Mexico is holding up as conditions tighten. Inflation eased to 3.94% in May, dropping back below 4%, and Banco de México has indicated its easing cycle is over; in response, markets have priced the chance of renewed rate hikes. In FX, USD/MXN remained capped below 17.50, while USD/BRL’s rally ran out of steam at 5.20.
Trade data continue to underpin the picture. Exports to the US reached a record $50.7bn in April, reinforcing Mexico’s standing within the United States-Mexico-Canada Agreement, although uncertainty persists over how the USMCA will be handled in future, with the US favouring periodic reviews rather than a straightforward renewal.
Macroeconomic Stability and Trade Strengths
We see Mexico’s economy as fundamentally steady, but the landscape is becoming more complex. Inflation dipping below 4% is positive, and record exports to the United States confirm strong trade fundamentals. However, we are now focused on the uncertainty surrounding the United States-Mexico-Canada Agreement (USMCA).
The decision by Banxico, the central bank, to end its cycle of interest rate cuts is a key signal for the peso. Markets are now pricing in the possibility of rate hikes, which supports the currency’s value for now. This hawkish stance provides a buffer for the peso against external shocks.
USMCA Uncertainty and Currency Volatility Risks
The primary risk on our radar is the upcoming USMCA review, set to formally begin on July 1, 2026. Recent statements from the U.S. Trade Representative favoring periodic reviews over a simple renewal have already caused implied volatility on USD/MXN options to rise from around 12% to nearly 16% over the past month. We expect this uncertainty to fuel significant price swings in the coming weeks.
Given this outlook, we are positioning for an increase in volatility rather than betting on a clear direction. We believe buying derivative instruments like options straddles on USD/MXN is the most prudent strategy. This allows us to profit from a significant price move, whether the peso strengthens on positive trade news or weakens on political friction.
Historically, we saw the peso swing by over 15% during the original NAFTA renegotiations in 2017-2018, showing its high sensitivity to trade politics. The current strength that has capped USD/MXN below the 17.50 level feels fragile. Holding positions that bet on this range continuing is now a high-risk strategy as we approach the review date.
